ANNUAL INVESTMENT ALLOWANCE

The Annual Investment Allowance (AIA) Fact Sheet

What is the Annual Investment Allowance (AIA)?

The AIA is a type of capital tax allowance that offers a

100% allowance on qualifying capital expenditure in the year of purchase. It is available to businesses regardless of their size.

What has changed?

In his Budget statement on 19 March 2014, the Chancellor announced that the AIA limit will increase temporarily

from £250,000 to £500,000 per annum with effect from 1 April 2014 for companies and from 6 April 2014 for sole traders/partnerships. The limit was due to revert to £25,000 with effect from 1 January 2016 but the Chancellor confirmed in the March 2015 Budget that the allowance will not be falling to £25,000 but set at a more generous level. The revised limit will be announced in the

2015 Autumn statement.

Why has it been introduced?

The measure is designed to stimulate growth in the economy by providing a time-limited incentive for businesses to make new investment in new or used plant or machinery.

In addition to providing a financial incentive for business investment in capital equipment, the initiative is also expected to help suppliers and manufacturers by increasing their order books.

Over the last few years we have regularly come across business owners delaying decision-making to acquire plant and machinery because of the continuing economic uncertainty. It is anticipated that this policy will mean

that some of those businesses will be able to pursue capital investment with a significantly reduced level of financial exposure.

Who can claim?

Almost any business whether chargeable to corporation tax or income tax is eligible for the AIA. One exception of a business structure that cannot claim the AIA is a mixed

partnership (for example, a partnership comprised of both individuals and companies) and also Trusts.

How does the increased AIA benefit my business?

The main advantage of AIA is that it accelerates the timing of tax relief on qualifying capital expenditure. Depending on the timing of the investment, the temporary increase

in AIA means that businesses may be able to bring forward the tax relief on more of their capital expenditure. However it is worth businesses considering advancing

or deferring investments in order to maximise their

AIA over the period it is available.

What is qualifying expenditure?

Qualifying expenditure covers most assets purchased for use by businesses. It includes:

• Office furniture and equipment

• Vans, lorries and equipment

• Building fixtures e.g. shop fittings, kitchen or bathroom fittings
• Business machines e.g. printing press, lathes, tooling machines
• Tractors, combine harvesters and other agricultural machinery
• Gaming machines, amusement rides

• Computer hardware and qualifying software

• Computerised/computer aided machinery including robotic machines
• Wind turbines and fibre optic cabling
• Driving school cars (adapted with dual control mechanisms)

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The Annual Investment Allowance (AIA) Fact Sheet

Are there any items of capital expenditure that do not qualify?

• Land, buildings or cars

• Expenditure incurred in the accounting period when trade ceased permanently

• Existing plant and machinery

• Plant and machinery that was gifted

• Plant and machinery used by a person for leasing under a long funding lease and subsequently brought into use by that person for the purpose of a qualifying activity

• Change in the nature/conduct of the trade carried out by a person other than the person incurring the capital expenditure and the AA is the main or one of the main benefits of making the change

Are there any limitations?

Where the chargeable accounting period of the business is more or less than a year, the maximum AIA is proportionately increased or reduced.

Also, where a business’ accounting period straddles a date of change of the AIA limits (i.e. 1 or 6 April 2014 or

31 December 2015), there is an impact on the maximum AIA available to the business in that accounting period. In calculating the maximum AIA available to the business, the accounting period is divided into separate notional periods straddling the date of change and the AIA limits are time apportioned to arrive at an annual AIA limit. In each notional period, the prevailing AIA limit without apportionment cannot be exceeded. See below for examples.

What happens after 01 January 2016?

We do not know for certain but the AIA limit is expected

to reduce to a more generous level than the pre April 2012 level of £25,000 with effect from 1 January 2016 and the revised limit is due to be announced in the 2015 Autumn Statement. It may therefore be important that businesses planning to invest in the near future do so before 2016 whilst the higher temporary increase in the AIA limit

is in place.

How is it relevant to leasing?

The AIA can be claimed where there is a hire purchase (HP) arrangement in place with intent of ownership. You do not have to have paid in full for the plant or machinery to claim the AIA. The allowances are given as though it was an outright cash purchase and ownership is deemed from

the beginning, even though the rentals are payable over the term of the HP agreement.

Tax relief is also available on interest charged to the profit and loss account.

Assets acquired under leases under which the lessor has the right to claim capital allowances are not eligible for AIA. If a lease is treated as a long funding lease, the lessee will normally be entitled to claim capital allowances and we would suggest that anyone in this situation should take advice from their tax adviser to check their AIA entitlement.

How is green technology treated under the AIA?

Investment in certain green technologies is eligible for enhanced capital allowances (ECA). There is no maximum limit for ECA. ECA is a 100% first year allowance (FYA) available for the cost of capital expenditure in the chargeable period in which it is incurred. There is no

time apportionment of the FYA if the chargeable period is less than twelve months. Businesses will need to take their own advice as to which expenditure qualifies for ECA or AIA and which claims to make.

How do I claim AIA?

From 1 April 2014 to 31 December 2015, depending on the timing of the capital expenditure and the accounting period of the business, the first £500,000 of expenditure per annum is 100% allowable effectively as a deduction

in calculating the taxable profits of a business. Any excess qualifying expenditure is dealt with under the normal capital allowances regime attracting 18% or 8% annual Writing Down Allowance (WDA) in the first year and the balance going into the pool of allowances for subsequent years. Example 1 below demonstrates how this works, although we would encourage you to speak to your financial adviser or whoever is preparing your accounts to ensure that you benefit from the allowance to which you are entitled.

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The Annual Investment Allowance (AIA) Fact Sheet

Additional important points to consider:

• The timing of investment can be critical. Equipment bought on and after 1 January 2016 will be subject to the reduced AIA limit as announced in the March 2015

Budget. The revised limit is expected to be confirmed in the 2015 Autumn Statement.

• The AIA limit for accounting years ending between

1 April 2015 and 31 December 2015 will be £500,000. But where your business has an accounting period which straddles 1 April 2014, or 31 December 2015, or is for a period other than a year, a calculation of the limit needs to be performed. If, for example, your accounting year ends on 31 December 2014, you need to split the accounting period (for AIA purposes only), into two periods:

1 January 2014 to 31 March 2014 (portion of £250,000 AIA); and

1 April 2014 to 31 December 2014 (portion of £500,000 AIA)

The AIA limit for the accounting year is the sum

of the portions of the AIA limit for each sub-period. Also, the amount of expenditure qualifying for the AIA in the sub-period ending 31 March 2014 is limited to

£250,000. The timing of expenditure may affect the amounts of capital allowances available in each period.

How the AIA has changed over the years

The AIA was introduced in April 2008, providing 100% allowance on the first £50,000 investment in qualifying capital expenditure. The maximum allowance was doubled to £100,000 for qualifying expenditure incurred from

1 April 2010 (6 April 2010 for unincorporated businesses), and was reduced to £25,000 with effect from 1 April

2012 (06 April 2012 for unincorporated businesses).

In the Chancellor’s 5 December 2012 Autumn Statement the AIA limit was temporarily increased from £25,000

to £250,000 for a two-year period from 1 January 2013 to 31 December 2014.

Example 1: Maximum AIA vs Actual AIA

For a company with a 31 December 2014 year end, the maximum AIA is £437,500 because the AIA limit increased on 1 April 2014 (during the accounting period):

1 January 2014 to 31 March 2014: 3/12 * £250,000 = £62,500, plus

1 April 2014 to 31 December 2014: 9/12 * £500,000 = £375,000

Therefore maximum AIA is £437,500

However, the actual AIA available depends on the timing of the expenditure. The balance of expenditure not eligible for the AIA will be eligible for the Writing Down Allowances (WDA). The AIA available in three of the possible scenarios is outlined below.

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The Annual Investment Allowance (AIA) Fact Sheet

Example 2: Accelerating expenditure

A sole trader has a 31 March year end. He is planning to replace numerous machines at a cost of £375,000.

The machines are main pool assets eligible for Writing Down Allowances (WDAs) at 18%. No other capital expenditure has taken place, or is planned, over the two years ending 31 March 2016. He decides to defer the expenditure from the year ending 31 March 2015 to dates between 1 April 2015 and 31 December 2015 (part of the accounting year ending 31 March 2016). His marginal tax rate is 45%.

In the above example, the AIA generates a total of £168,750 tax savings in both scenarios, but if expenditure is deferred by 9 months, the tax savings are deferred by a year. If, alternatively, some of the expenditure is deferred beyond 2015, then the amount of the AIA available may be restricted if the AIA is reduced from 1 January as announced in the March

2015 Budget.

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The Annual Investment Allowance (AIA) Fact Sheet

Example 3: Deferring Expenditure

A sole trader has a 31 December year end. He is planning to replace numerous machines at a cost of £500,000.

The machines are main pool assets eligible for Writing Down Allowances (WDAs) at 18%. No other capital expenditure is planned in the two years ending 31 December 2016. He plans on purchasing the assets in the year ending

31 December 2015 (after which the AIA limit is expected to be reduced*). The sole trader pays income tax at 45%.

* AIA of £25,000 has been included for illustrative purposes only and was based on the announcements made in the March

2014 Budget. The actual AIA effective from 1 January 2016 is due to be announced in the 2015 Autumn Statement.

** In the example, over the 2 accounting years ending 31 December 2016, total tax savings are lower with expenditure deferral, although writing down allowances will be available in subsequent years with deferral.

Would you like to find out more?

If you would like to find out more about how this potential tax relief could be applied to any capital expenditure you may be planning, please don’t hesitate to get in touch.

However, as it is crucial to get the timing of your investment right, and to ensure you understand the effect on your tax and financial position, we would strongly encourage you to speak to your financial advisers before taking any action.